City broker Liberum has hit back at claims Sirius Minerals PLC (LON:SXX) has underestimated the cost of digging a huge tunnel at its Woodsmith polyhalite mine in North Yorkshire by as much as US$530mln.
FTSE 250-listed Sirius was forced to up its project cost estimate back in September by US$500mln, taking the total requirement – including contingencies – to US$4.2bn.
Much of that increase was down to the “optimisation” of its mineral transport system – a 37km long conveyor belt that will take the fertiliser from the mine to the old Redcar Steelworks dock for processing and shipping.
But in an op-ed on Thursday, the Financial Times argued that Sirius still hasn’t understood how much money is needed to build such a big and deep – it is 250m underground – tunnel.
“A new, wider tunnel will cost $1.46bn or US$39mln (£28mln) per kilometre,” said the FT. “That figure looks low.”
“Data from the British Tunnelling Society show that tunnelling costs for this diameter have ranged up to £35mln per kilometre previously.
“Should dig costs rise to the heights of past projects, it would add US$530m to costs — eating up its budget for contingencies.”
Sirius’ estimates have to align with lenders’
Liberum analyst Ben Davies has disputed the claims, though.
“The implication that the tunnelling costs could jump a further US$530mln and take up the entire project contingency is at odds with engineers' detailed assessments of all available technical information and extensive ground investigation,” read a note to clients.
“The company’s base case (P65) contingency across the entire project is US$465m – i.e. there is a 65% chance that contingency is below this level.
“Given the amount of debt the company expects to take on, lenders will also be undertaking the same level of due diligence and will need to come to a similar view in order for the project to be financed – hence the Sirius view can’t deviate materially from the view of independent technical experts employed by the lenders.”
Not only that, but Davies reckons the FT got its calculations wrong when converting from US dollars into pounds.
At the current exchange rate of US$1.30, the US$39mln cost for every kilometre of digging equates to just over £30mln.
Sirius’ value ‘isn’t sensative to capex overruns’
Even if Sirius does have to lift its capex forecasts once again, Davies doesn’t expect it to impact the company’s value much at all.
“We use the P65 contingency of US$465m and if we took this even beyond the P80 of US$580mln, the impact would have little bearing on our project net present value of US$6.8bn.
“Indeed, by simply applying POLY4 pricing in line with existing contracts at US$140/t instead of US$125/t we could add another c.US$1bn to project NPV, dwarfing any potential capex over-run.
“The more important factor will be the amount of headroom the company has in eventual debt structure to see it through a worst-case scenario without the requirement of further equity and we await further developments from the company on this front before the end of April.”
Sirius shares were steady at 20p on Friday morning.